How will health reform affect state health care costs? Will reform bankrupt states as some Republicans say? Or will costs be negligible, as Democrats claims? According to a study by Holahan and Dorn (2010) the answer is somewhere in the middle.
Most of the additional costs will come from expanding Medicaid to newly eligible population, individuals between 100% and 133% of the federal poverty line.
“These state cost increases range from $21.1 billion to $43.2 billion over the 2014-2019 period, with the difference depending on the extent of beneficiary participation. These represent increases in state spending of 1.4 to 2.9 percent relative to what states would spend on such adults in the absence of reform.”
Although there will likely be a significant increase in the number of Medicaid beneficiaries, the federal government is financing a large share of this expansion.
“the federal government will pay 100 percent of health care costs between 2014 and 2016. In 2017, this percentage will drop to 95 percent, and continue to decline until 2010—falling to 94 percent in 2018, 93 percent in 2019, and 90 percent in 2020 and thereafter.by advocacy groups and providers. Even with higher participation rates, the increased cost to states will be limited. States that will be affected the most from increased participation among those who are currently eligible are those with more current.”
Although the federal government is footing most of the bill, Tyler Cowen thinks it should go a step further. “The correct fiscal policy move would have been, and still is, to take Medicaid away from the states and make it fully federal.”
Another area where states will lose money is through the additional administrative costs needed to process more Medicaid applicants.
However, states will also receive some savings. States and local governments often provide medical care for poor, non-Medicaid eligible individuals. Because more of these individuals will receive Medicaid coverage, this should displace a significant share of state/local spending in these areas. Additional areas of savings include:
- states could stop covering individuals with incomes above 133% FPL
- CHIP beneficiaries (children) with incomes below 133% FPL will be transitioned to Medicaid
- states that currently cover parents between 133 and 200 percent of FPL can, in effect, shift these parents to full federal funding by implementing PPACA’s “basic health program” option, through which states convert PPACA’s tax credits to funding for contracts with health plans serving adults in this income range. Alternatively, they could just end coverage altogether.
Who are the winners? The poor and near-poor who receive additional coverage. Who are the losers? Providers who must accept lower payment for Medicaid and the rich who must pay higher taxes to cover these individuals.
- Holahan J and Dorn S “What Is the Impact of the Patient Protection and Affordable Care Act (PPACA) on the States?” Urban Institute, Quick Strike Series, June 21, 2010.